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Man’s growing pains

AHL and GLG were meant to be two unstoppable engines, but they have suffered a jolt

For about 20 years, from when Man Group ditched sugar trading to concentrate on hedge funds, the company ran on one engine. But what an engine: AHL, a fund using whizzy algorithmic programmes to follow momentum in financial markets, produced excellent investment returns and thus juicy fees.

As cash flowed into AHL and its numerous spin-offs, Man became a wonderful investment. If you bought the shares in 1998 you could have banked a twelvefold return a decade later; you would also have enjoyed a strengthening flow of dividends along the way. 2008 – the year of Lehman’s demise – could hardly have been better. AHL’s investment performance was plus 33%, an excellent advertisement for hedge funds’ boast that they can protect wealth whatever the weather.

Then, in 2009, AHL spluttered. Investment performance was minus 17%. Was AHL broken? Man’s directors argued not (and were later vindicated: plus 15% followed in 2010) but a second engine was deemed necessary anyway.

So last year Man paid .6bn for GLG, a “traditional” hedge fund in the sense that it uses highly paid human beings, rather than computers, to make investment decisions. The dividend was quietly cut at the same time. But, hey, assets under management had expanded by two-thirds and Man’s shareholders would no longer have to be so stressed about AHL’s volatility.

Nice idea, but the 25% fall in Man’s share price today – to a level first seen in 2001 – suggests the strength-through-diversity model isn’t working as intended.

GLG itself has developed a splutter. One of its flagship hedge funds is down 12.6% this year, which doesn’t help in retaining investors. Other problems for Man include unhelpful foreign exchange movements and a wider dash for cash in what chief executive Peter Clarke called “turbulent markets”. But the net effect was a bn fall in funds under management to bn in the space of three months; embarrassed analysts had been expecting a small rise.

It is possible the headaches will clear quickly. Three months is no time at all; GLG’s founders are heavily incentivised to up their game; and investors may regain enthusiasm for hedge funds.

But the two-engine strategy, designed to improve Man’s status as a sales powerhouse, has suffered a jolt. The world’s largest listed manager of hedge funds is suddenly struggling to get bigger. Growth looked so much easier when Man was smaller. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds